REIT to work only if tax system is aligned: Kotak Realty

Market watchdog Sebi issued draft guidelines to allow Real Estate Investment Trust (REIT) in India. This could aid the cash strapped sector with the capital infusion in the form of REITs.

However, S Sriniwasan, Kotak Realty Fund believes that for the REIT market to really work the central government has to ensure that our tax system is aligned. Both the stamp duties and income taxes need to be aligned because stamp duty is still a state subject and rental incomes are taxed by the income tax authorities either bas business income or income on house properties.
Nevertheless, he says Sebi has delivered on its promise and now the ball in central government’s court now, says Sriniwasan in an interview to CNBC-TV18
REIT was very close to being launched in 2008 but because of financial crisis the note got withdrawn. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Real Estate Investment Trust (REIT) is an area in which public awareness is completely lacking. If you can tell us exactly how this will be put together provided of course an investment trust is actually launched?
A: First of all the new set of regulations that Sebi has come up with is certainly a workable regulation and it addresses a need gap in the market where investors have moved away from equities and they have been chasing yield, fixed income or gold.
This particular regulation enables an investor to generate regular income in the form of dividends and effectively the trust will own an income producing asset and as per the new regulations it is obligatory for the trust to distribute 90 percent of the rental income to the investors.
So, in that sense the investors not only participate in the rental income on a regular basis, but also participate into capital appreciation of that. Q: If I can just go back we need to even elaborate on how the trust will be put together. What you are saying is that there are mutual fund investors or other kind of investors who put together a corpus. The corpus is invested in rental property and that rent is distributed as dividend. Is that how the principle works?
A: That is exactly how the principle works. The asset management company manages the trust as an asset manager. The company will then be responsible for ensuring that the building is maintained, the rental incomes are collected and if there are churn in the rentals they are expected to find new tenants. It is exactly on the same structure as you just outlined. Q: There is a note that I was reading on the same which mentions that there has to be a strengthening of legal framework before this actually takes off and would be a prerequisite. In your opinion what is the legal framework strengthening that we would need to see and hence when the REIT can realistically come into effect?
A: Globally for REITs to work well, you need to have the stamp duties aligned as well as the income taxes aligned. The most important things is the stamp duty which is a state subject in India, the center cannot do much about it. Let us say if a developer has a bunch of assets and he wants to put it into a trust he needs to transfer the asset into the trust which has an impact on stamp duty, which is a state subject so I guess the center cannot do much about it.
The second impact is when an income is generated in the trust as a form of rental income, at this point in time those rental incomes are taxed by the income tax authorities either as business income or incomes on house properties. Globally the tax is actually exempt if it is held as a REIT. For example, if Rs 100 is generated as rent and 90 percent of it has to be distributed then investors will get Rs 90 as rent, whereas, in the current scenario if Rs 100 is generated as rent, after tax the investors will get only Rs 6.8 or thereabouts.
So for the REIT market to really work the government has to ensure that our tax system is aligned. Sebi has delivered on its promise, now it is up to the central government to get this market kicked off.